Double-digit inflation ‘snowballs’ and makes it harder to tame rising prices

Inflationary inertia, which is the inflation of the recent past weighing on current and future prices, makes it difficult for the BC to hold the transfer, even by raising interest rates

The strong resistance of inflation, in the double digits in the 12 months since September 2021, ignited the warning signal for the increase in inflationary inertia. This inertia, which is the inflation of the recent past weighing on current and future prices, makes it difficult for the Central Bank to hold the transfer, even raising interest rates.

“Unfortunately, we are carrying a lot of this inflation from the past to the present”, says LCA Consultores economist Fábio Romão. Several factors have contributed to this. One of them is that inflation ended 2021 above 10%, which makes this mark a parameter for readjustments. There is also strong price pressure from wholesale to retail. And the mismatch of global supply chains, exacerbated by the war in Ukraine, makes pricing difficult.

Much of the resistance to inflation, which in the 12 months through April reached 12.1%, according to the IPCA, was fueled by formal indexation. These are adjustments that follow contracts, such as rent, school and health insurance, or are authorized by the government (fuel, energy).

At the request of Estadão, Romão measured the impact of formal indexation on inflation and found that, in the pandemic, the peso increased by two percentage points. In December 2019, it accounted for 32.05% of the IPCA and, in April 2022, it was already 34.15%. Regulated prices accounted for 50% of the increase, especially gasoline, diesel and electricity.

Informal

Another part of the inflation resistance results from informal indexation, which boosts prices by the cost increases incurred. This is the case of tinsmith Vinicius Aguirre, who readjusted the value per piece restored from R$350 to R$400, as automotive paint, a petroleum derivative, rose. “My indexing is based on the ink, which is the most expensive.”

Another factor that weighs in this game is expectation. “If agents perceive that the BC is having difficulty meeting the (inflation) target, they raise prices, before inflation hits costs”, says FGV’s price index coordinator, André Braz.

Indexing is a defense mechanism against the loss of the purchasing power of money. “The higher the inflation – and the double-digit one is frightening –, it is clear that there is an incentive to increase indexation, whether formal or informal”, says Silvio Campos Neto, partner at Tendências Consultoria. Because of Brazil’s history of hyperinflation, this mechanism may be stronger, he notes.

spreading

For Romão, the spread of inflation is proof that price pressures due to informal indexation have increased. In April, 78.75% of the IPCA items had a positive change, a record result. The movement, according to him, is more visible in services. And these readjustments are given the green light at a time when Brazilians choose to consume more services than goods.

Fear of losing customers reduces transfers

Service providers have readjusted their prices in recent months, but say that this pass was below what was necessary to fully cover the high cost of inputs and expenses. It’s just that they fear losing customers and revenue.

Hairdresser Luci Machado, owner of Toko’s Cabeleireiros, for example, increased the price of manicures by 20%, pedicures by 16% and men’s haircuts by 11%.

In the amount charged for the female cut and other services, she did not change. “If I increase all the services at the same time, the client gets scared and leaves the salon.”

She complains about the high cost of basic products she uses on a daily basis. Until recently, she paid R$27 for a liter of national shampoo; today, he says he spends R$ 45. The nail polish used to cost R$ 5 and now it costs twice as much.

As he is passing on less than he should, Luci doesn’t even put everything on the tip of the pencil so as not to get discouraged. Her focus is to keep the salon running. Therefore, she has used other strategies, such as reducing product inventories. “I don’t know if I will have demand, and stopped product is a loss.” She also decided to do some “pleasures” for the customers. In haircuts, for example, washing and drying are free.

Integrative therapist Patrícia de Freitas Lázaro is another service provider who chose to readjust therapy sessions at a slower pace than the rise in costs. In a year and a half, she increased her therapy sessions by 25%.

“Only the gasoline I use to go to the service and the material, such as essential oils, has gone up much higher than that”, says the therapist. The liter of sesame oil used in therapeutic massages, which cost R$30 before the pandemic, today does not cost less than R$100.

Despite having readjusted the services in a smaller proportion than the high costs, Patricia says she had compensations. With the pandemic, the demand for therapies has doubled. “This is helping to offset cost pressures.”

Kneaded

The last time tinkerer Vinicius Aguirre, owner of Hot Roder’s Funilaria e Pintura, had his prices readjusted was in 2015, when the value per repaired part rose from R$300 to R$350. At the beginning of the year, this amount was R$ 400.

The price correction was necessary because costs went up. Automotive paint increased between 30% and 35%, but he readjusted manpower by 15%. Aguirre calculates that, if the volume of service were increased enough, the volume of service would fall. “There are a lot of people riding in a dented car”, he observes.

Due to the tight market for day-to-day services, the tinsmith focused on repairing old collection cars, where he can earn more.

Diarist Maria Elza de Jesus had no choice. Seeing the rise in food prices, in addition to bottled gas, she decided to readjust the price of cleaning from R$150 to R$170. But the employers offered an increase of R$10, claiming that they paid for the transportation.

Maria Elza even tried to argue that the minimum wage was readjusted, but was unsuccessful. “What can I do? I need to work earning little or a lot”, she concludes.

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